Wednesday, April 29, 2015

Chinese authorities are mobilizing food supplies for regions of Tibet that were also affected to varying degrees by the April 25 earthquake that hit Nepal. The earthquake produced landslides, caused houses to collapse, and 7 people were killed in Tibet. Chinese news outlets are reporting the Nepal earthquake as 8.1, higher than the 7.8 reported by news outlets in the rest of the world.

Grain Bureaus are sending emergency grain supplies to the affected regions to ensure that the military and local population (in that order) are adequately supplied with food. The Tibetan regions include Nyalam, Gyirong, and Tingri Counties in Xigaze Prefecture and Burong County of Ali Prefecture.

Effects of earthquake in Tibet

Grain is being distributed as part of the work of a temporary earthquake relief leadership group established in Tibet. The Chengdu branch of Sinograin, China's grain reserve-management company in neighboring Sichuan Province, is also sending food to the disaster area.

The Xigaze Prefecture's state-owned grain enterprises reported have grain reserves of 4.25 million metric tons, including 1.6 tons of milled grain products--presumably rice and noodles. Ali Prefecture reportedly has 400,000 metric tons of emergency grain supplies, and 80,000 kg has already been distributed to people affected by the disaster in Nyalam County.

The target price subsidy pilot replaced the "temporary reserve" price support program for soybeans and cotton in 2014/15. The program allows market supply and demand to determine a market price. The government will estimate the average price for the marketing season, calculate the difference between the target and market prices and pay farmers a direct subsidy based on that difference (if the market price is less than the target).

The soybean target price of 4800 yuan per metric ton was announced in May 2014. The market price has been well below the target since last fall's harvest, but the government still has not announced the average market price that will be used to calculate the subsidy.

Farmers say they were not happy with the market price after last fall's harvest. They held on to their beans, hoping for a price rebound that never came. Instead, prices kept dropping to as low as 3200-3600 yuan per metric ton now. Farmers still have an estimated 40 percent of their soybeans unsold--normally nearly all of the beans would be sold by this time of the year.

With spring planting approaching, farmers are under pressure to sell their soybeans to generate cash for purchases of seed, fertilizer, pesticide and other inputs. If farmers sell soybeans in large quantities now they will realize losses on their crop, and it may push prices down even further.

The "market price" for calculating the subsidy is the average paid during the October-March marketing season. However, soybean-selling was slow, and less than half of the beans were sold by March. With prices dropping, most farmers will sell their soybeans at a price much lower than the official "market price" calculated for October-March. The "market price" is based on prices paid by crushing factories and warehouses, not the price received at the farm gate. Thus, although many farmers are selling their beans at prices more than 1000 yuan per metric ton less than the target, the subsidy could be based on a smaller difference of 600-800 yuan per metric ton.

According to news reports, farmers have no idea when they might receive a subsidy or how much it might be. The target price for the 2015 crop has not been announced either. [note: The new target price of 4800 yuan/metric ton was announced April 28, 2015, the day this post was written].

The delay in announcing the subsidy could be due to behind-the-scenes arguments over how to calculate the "market price." Central government officials could be quarreling with Heilongjiang Province and State Farm officials over soybean acreage statistics that will be used to distribute the subsidy funds. The National Statistics Bureau's estimates of acreage routinely differ from the province's statistics by a significant margin.

With spring planting time approaching, many dissatisfied farmers are planning to shift land from soybeans to corn. According to an article last week, some in the industry think that soybean area will decline 15 percent in 2015. This could mean even bigger soybean imports and an even bigger corn surplus in China after the first year of the target price pilot.

Thursday, April 23, 2015

The National Bureau of Statistics report on China's economic indicators for first quarter 2015 reveals a tension between inflationary wage pressure and policy support of grain prices against broader downward pressure on prices.

The NBS report says that "Primary Sector" GDP--mainly agriculture--was up 3.2 percent in Q1 2015. That's about 1 percentage point slower than its customary 4-to-5-percent growth rate in recent years. It's also less than half the 7 percent growth rate for all GDP, an indicator that agriculture's share of the economy continues to decline as China's overall economic growth downshifts.

Another telling indicator buried in the tables in the Chinese version of the report is a 3.6 percent decline in the number of rural migrant workers during Q1 2015. This has to be the first decline since they started reporting this statistic. The declining number of migrant workers is an indicator that there are fewer construction sites and that factories are scaling back operations.

Yet, there is still substantial inflationary pressure in the Chinese economy. The average monthly wage of migrant workers (3000 yuan/month) was up 11.9 percent in Q1 2015 compared to a year earlier. That was over 10 percentage points faster than the 1.2-percent growth in the consumer price index. This is not as rapid as wage growth which topped out at over 20 percent several years ago, but is still a big increase--especially for an economy in downshift mode. Why would real wages be growing so fast in a downshifting economy?

The downshift is evident in the shrinking pork sector. Overall meat output was reported down 1.4 percent for Q1 2015. Pork constituted two-thirds of meat production, and pork output was down 3.1 percent. The number of hogs slaughtered was down 3.7 percent.

The number of hogs has been shrinking continually since last year but the Ministry of Agriculture and National Bureau of Statistics are reporting numbers of very different magnitude. The NBS Q1 2015 report said China had 453.5 million hogs and the number was down 4.2 percent from a year ago. The MOA reported that the March 2015 hog inventory was down 10.7 percent from a year ago (MOA stopped publishing an actual inventory number three years ago). The NBS number seems more plausible, but probably neither number is very accurate in view of the entry of new large-scale farms and exit of backyard operations that makes it impossible for statisticians to count 450 million pigs on a monthly basis. What we do know is that there are a lot fewer pigs (over 20 million fewer based on NBS's number; over 45 million fewer based on MOA's) consuming a lot less feed.

Getting back to the inflation story, the CPI for food reported for Q1 2015 was up 1.9 percent year-on-year. But the further back you go in the supply chain, the greater the downward pressure on prices. The factory-level Producer Price Index for food manufacturers was down 0.1 percent and the PPI for agricultural product processors was down 2.3 percent.

Farm and food prices were not as soft as industrial prices. The overall CPI grew 1.2 percent in Q1 2015, slightly slower than the CPI for food. Industrial producer prices were down 4.6 percent, twice as fast as the PPI for agricultural product processors.

Agricultural producer prices overall were flat, with an increase of 0.4 percent. Compare this with the 11.9 percent increase in migrant worker wages and wonder why anyone would stay on their farm. The surge in migrant worker wages is consistent with rising costs beyond the farm gate in processing and services--reflected in rising retail food prices--while the price of raw farm commodities is flat or falling. The rising migrant wages also translate to soaring costs of hiring farm labor for the influx of large-scale farms.

Consumer pork prices were down 1.7 percent, but producer prices for hogs were down 3.6 percent.

Consumer prices for grains were up 2.8% while producer prices for grains were up about the same amount (wheat 3.7%, rice 2.4%, corn 1.3%).

Producer prices for the most labor-intensive ag products were up. Producer prices for vegetables were up 3% and fruit prices were up 8.5%. Consumer prices for vegetables were up half as much--1/4%.

Consumer prices for cooking oil were down 5.7 percent while producer prices for oilseeds were up 3.4%.

Poultry and egg prices have risen 3-to-4 percent as they have staged a recovery from a serious avian influenza epidemic last year. Cattle prices are flat and sheep prices are down 9.6% from Q1 2014.

The Chinese government has kept grain prices at artificially high levels by stepping in to buy grain as international prices have fallen. According to another recent report, on April 8, 2015 the cost of U.S. no. 2 corn including duties was 1570 yuan. The price of domestic corn was 1000 yuan higher than the cost of imported corn--that's a 64-percent difference and about equal to the 65-percent tariff for importing corn without a tariff rate quota. The domestic-imported price difference was reported to be 900 yuan for rice, 700 yuan for wheat, and 1600 yuan for soybeans in March 2015. Grain reserves are at record-high levels, although no one knows for sure how high.

Despite excess supplies, the NBS report also says that Chinese farmers expect to plant even more grain this year. According to a planting intentions survey, farmers intend to plant 1.9-percent more land in corn in 2015, 0.2-percent more rice, and 0.7-percent more wheat. It's not clear where they're finding this additional land. Authorities have let cotton prices fall and announced a lower "target price" for this year. Cotton plantings are expected to decline 11.2 percent this year.

Thursday, April 9, 2015

According to news from Guangzhou, customs authorities there have broken up a beef smuggling ring that is suspected of illegally bringing 1351 loads of meat valued at 560 million yuan since 2014.

The gang allegedly bought frozen beef from the United States, Brazil, India, and Pakistan, and smuggled it into China by either evading customs, falsely reporting, or concealing the meat. The beef was cut up, packaged and then sold in Chongqing, Nanjing and Shanghai.The investigation involved 230 officers in Guangzhou, Shenzhen, and Foshan. They arrested 28 people as of April 7 and seized 24 metric tons of meat.

The beef case is part of the China customs "green wind" crackdown on agricultural products smuggling that began in 2014. Anti-smuggling efforts were also highlighted in the 2015 "Number one document" issued by the communist party central committee. Officials claim to have cracked 13,316 cases valued at nearly 45 billion yuan. The number of cases is reported to be up 32% from the year before. The largest number of cases involve rice smuggling.

China agricultural smuggling cases intercepted in 2014

Cases

Value

Number

Million yuan

Metric
tons

All cases

13,316

44,898

Rice

467

1,255

210,100

Meat

96

2,010

122,000

Sugar

5

96

983

Cotton

52

2,500

164,100

Others:
Wheat, corn, peanuts, edible oil, leather, feed

In March, Guangxi customs officials reported breaking up a ring suspected of smuggling 5614 metric tons of corn from Vietnam since last year. The gang was led by a man named Lu who purchased corn from a business associate in Vietnam, hired drivers to pick up the corn and truck it over the border at an unguarded crossing. The corn was brought to a warehouse in Nanning and then shipped to other parts of China.

Last September, Kunming customs authorities arrested six suspects from two gangs suspected of smuggling a total of 85,000 tons of corn from Burma into China by driving trucks over the border late at night.

This diagram describes smuggling routes for rice and corn from two cities on the Vietnam border to Nanning, the Guangxi provincial capital. A gang led by people named Shi, Huang, and Cai are suspected of smuggling 3000 tons of rice. Mr. Kong is suspected of leading a gang that smuggled 1600 tons of corn.

Smuggling is rampant because Chinese prices are much higher than the price of imported commodities. Imports of many commodities are restricted by quotas or bans. In its February report on farm commodity markets, the Ministry of Agriculture included the chart below showing the domestic price of long grain rice (blue line) and imported rice (pink) since 2009. The price of imported rice has been 25-35% less than the Chinese price since the 2013 harvest.

The MOA data show that Chinese wheat, corn, and soybeans all exceeded import prices by 30% or more.

Tuesday, April 7, 2015

With a surplus of cotton and falling prices, Chinese officials have cut their target price for this year's cotton crop and are urging farmers in the major production region to shift cotton acreage to wheat or hay.

The 2015 target price for cotton in Xinjiang Autonomous Region has been set at 19,100 yuan/metric ton. This is the target for the crop to be planted this spring and harvested in fall of 2015.

The subsidy is based on the difference between the target price and the market price. As of April 3, 2015, market prices for cotton lint in Xinjiang ranged from 12,950 to 14,200 yuan--depending on the grade--far below the target price.

The target price for the 2014 Xinjiang cotton crop was higher, at 19,800 yuan. The subsidy for the 2014 crop has just been distributed and totaled 450.5 yuan per mu (about $441 per acre).

Agricultural officials in Xinjiang say the target price pilot program allows market supply and demand to be the main guide for setting the cotton price. However, the officials are giving the market some assistance by issuing a guidance plan calling for cotton farmers to reduce cotton area planted this spring by 4,665,000 mu (769,000 acres). They recommend shifting land to spring wheat or hay in low-yielding or drought-prone regions.

The guidance appears to be an implementation of a structural adjustment campaign launched by the Ministry of Agriculture earlier this year. According to the communist party secretary of Xinjiang's agriculture department, the "temporary reserve" policy that supported cotton prices during 2011-2013 "stabilized" cotton area but it kept some low-yielding areas in production. Now they want to "improve" the crop structure in the region.

The party secretary said farmers giving up cotton (and presumably giving up the fat subsidy) have two choices: plant spring wheat or hay. Those who plant spring wheat are assured they will get the "general input subsidy" and "improved seed" subsidy for wheat plus a subsidy for water-conserving irrigation. The shift to hay is part of a plan to develop a hay-livestock industry (this was an emphasis of the Ministry's structural adjustment plan). Xinjiang officials plan to increase area planted in hay by 10 million mu (1.65 million acres) over five years. A detailed plan for the hay industry is in preparation.

Sunday, April 5, 2015

COFCO, China's State-owned agribusiness giant, gets more wheat-import quota than the rest of the industry combined. With imported wheat 30-percent cheaper than Chinese wheat, COFCO's favored access to imports make easy money that offsets losses on the company's other operations.

According to news in March, COFCO had been given 1.5 million metric tons of wheat import quota so far this year, more than the 900,000-mt combined total distributed to private-sector companies.

China has had record wheat harvests in the last few years, but it has a shortfall of the types of wheat needed to make western-style breads and baked goods. These products are in strong demand, but Chinese farmers are not producing these types of wheat in adequate quantities. Last month industry people said Chinese traders had purchased 300,000 mt
of no.2 high protein white wheat from Canada and 100,000 mt of
Australian prime hard wheat.

Wheat can only be imported by traders awarded a share of the government's 9.6-mmt annual import quota determined by its WTO commitments, but most of the quota is reserved for COFCO. According to the company's web site, COFCO has exclusive rights to handle the 90 percent of China's wheat import quota reserved for state-trading. The remaining 10 percent of the quota is divided up among all other applicants.

The price of quality wheat has soared far above global prices. The news report illustrated the price gap as of mid-March 2015. The FOB price for hard red spring wheat at U.S. Gulf ports was equal to US$ 220 per ton. Freight to China was quoted at $31 per ton. Adding duties and taxes, the total cost of imported wheat would be about $286. By comparison, the price of quality China-produced wheat at Shenzhen ports was $492 per ton.

Another recent article about COFCO reports that its near-exclusive import rights contribute significantly to its bottom line. This article quotes industry insiders who say COFCO has a cost advantage over other flour-millers due to its privileged access to import quota. The industry insiders estimate that COFCO earns 200-to-400 yuan per ton on 1 million metric tons of wheat imports annually. (The numbers above suggest that earnings this year are much larger.) They say COFCO uses these profits to offset losses incurred in milling grain.

According to its annual financial report, COFCO made a modest profit of HK$ 80 million on flour-milling during 2014. The numbers above suggest that all the profit came from importing cheap wheat. COFCO lost HK$ 200 million on rice-milling during 2014. COFCO does better in flour-milling than in rice- milling
because it has bought a number of mills with popular flour brands. The
article says brands are not as valuable in the rice industry.

Both industries have huge excess capacity with only 30 percent of capacity utilized. Many wheat mills only operate for a few months after the harvest. It points out that the government's intervention in grain markets has made Chinese grain prices the highest in the world, cutting into the bottom line of millers. The article suggests that flour-milling margins will be even narrower in 2015. One factor is a plunging price of wheat bran byproducts (used for feed).

Thursday, April 2, 2015

Prices are soaring for a type of corn seed suited for planting in cold climates, an indicator that corn is continuing to displace soybeans in China's far-north agricultural fringe.

A report from China's Grain and Oils News says that the price of Demeiya No. 1 corn seed has doubled from 675 yuan per bag to 1375 yuan in some areas of Heihe, a region of Heilongjiang Province that borders Russia. Each bag contains 50,000 seeds, said to be enough to plant 7.5 mu. Demeiya No. 2 and No. 3 seeds are sold by weight, and their price has risen from 18.5 yuan/500g to 22.5 yuan/500g.

Demeiya is a variety of corn developed by German seed company KWS to grow in northern climates where the growing season is short. The seed was introduced in China as result of a link-up between KWS and Kenfeng Seed, a company linked to the State farm system in Heilongjiang Province which controls large tracts of land along the border with Russia. Demeiya seed was introduced in the early 2000s, passed provincial seed evaluations in 2004 and has been marketed widely since 2007. More on Demeiya in this 2012 post.

Traditionally, only soybeans could be grown in these frigid areas near the top of the globe. The Demeiya varieties have allowed farmers to switch to corn all the way up to the Russian border.

The rising prices for Demeiya seed reflect both an increase in demand and limited supplies of the seed. People from Kenfeng Seed Co. told the reporter that officials in Heilongjiang had recommended cutting back on corn area this year because the supply of Demeiya seed was expected to be down. However, farmers in northern regions of Heilongjiang like Heihe and Bei'an are eager to plant corn, so demand is robust.

The seed is sold through two main channels: seed shops operated by Kenfeng Co. and dealers who buy the seed under contract. The company says they set the price in their shops and have not raised it, but many of the shops are out of stock. The contractors could sell the seed to others at marked-up prices. Kenfeng company officials said it was "not convenient" to give reasons for the soaring prices. An official from Heilongjiang Province's seed bureau attributed the rise in price to strong demand for the seed.

The rising Demeiya seed prices are a reflection of Chinese policies that are squeezing out soybeans and creating a massive corn stockpile. Chinese officials are supporting their corn prices at a high level and restricting corn imports. They gave up trying to support soybean prices last year. Since there are no limits on soybean imports, supporting domestic soybean prices left the government as the only buyer of the expensive beans while cheaper imported beans dominated commercial channels. This year, the support price for soybeans has been abandoned and market prices are plummeting due to massive global supplies of soybeans.

There is a "target price" subsidy for soybeans but indications are that the program is not working well. As of March 5, farmers in Heilongjiang had sold just 1.6 mmt of soybeans this year, down 60 percent from last year. Reported prices paid by traders are in the range of 4100-4200 yuan/mt, but oilseed crushers are reportedly paying 3800-3900 yuan/mt for soybeans in Heilongjiang. Imported soybeans cost less than 3000 yuan. Domestic soybeans are mostly being used for food processing, while the crushing market becomes even more dominated by imports. According to the target price program, farmers should get a subsidy based on the difference between the market price and the target price of 4800 yuan/mt. However, no one is sure how the program will operate and farmers are not confident they will get a subsidy.

Meanwhile, The Wall Street Journal reports that U.S. farmers are shifting their planting in the opposite direction: from corn to soybeans. Chinese policies are certainly playing a role in the decisions of U.S. farmers this spring. Soybean exports to China are booming and corn exports have slowed to a trickle.

China's domestic policies are gradually pricing its soybean crop out of the market, encouraging unimpeded imports to dominate the soybean market. Corn prices are sustained at a high level and corn imports are limited by import quotas and the threat of GMO rejections. The northeastern provinces are becoming a giant corn and rice mono-crop--most of the corn going into government reserve bins.

If market forces were allowed to operate, China's surplus of corn would push Chinese corn prices down and reduce area planted in corn this year. Instead, authorities are preventing prices from falling and encouraging an even bigger corn crop this year.